Tax Reform: what changes in the new amendment

After 30 years of negotiations and many comings and goings, the Chamber of Deputies in Brazil have approved the basic text of the Tax Reform that is committed to simplifying consumption tax in Brazil. 

The core of the Proposed Amendment to the Constitution – called PEC 45/2019 – is to unify federal taxes and those of other federative entities that affect the consumption of goods and services, in order to simplify the collection of taxes in different locations in Brazil. 

The text will still undergo a vote on highlights (possible specific changes) in the Chamber, before being sent to the Federal Senate, where, in addition to being able to undergo further changes, it will also need two-thirds of the House to be approved.

It is important to highlight that, even if Congress approves everything quickly, the changes are expected to start to take effect only in 2026, in a gradual process, which should extend at least until 2033.

Even though, we have selected the main questions of the PEC so you can understand what changes in general lines: 

Will I pay more tax after Tax Reform?

Both the federal government and the rapporteur for the PEC, deputy Aguinaldo Ribeiro, claim that there will be no increase in the tax burden in general. However, tax collection will be redistributed between sectors of the economy, which means that you will probably end up paying more for some services (which are currently less taxed), and cheaper for some consumer goods (which are currently more heavily charged ).

Which taxes will be replaced, created or abolished?

The PEC unifies the municipal tax ISS, the state ICMS and the federal PIS, Cofins and IPI into three new taxes. The Contribution on Goods and Services (CBS), managed by the federal government; and the Tax on Goods and Services (IBS), managed by the Federative Council, composed of representatives of the States and municipalities, will be levied identically on the same basis. The third, called the Federal Selective Tax (IS), will focus only on goods and services that are harmful to health and the environment.

To better understand:

  • In the sphere of federal taxes, PIS and Confins will become a single tax: Contribution on Goods and Services (CBS);
  • The ISS, which is the responsibility of the municipalities, and the state tax ICMS, together will form the new Tax on Goods and Services (IBS);
  • The sum of the CBS and IBS rates will dictate the rate of what is informally called IVA (Value Added Tax);
  • The IPI will cease to exist and will be, in a way, replaced by the IS (becoming levied on fewer items).

What will be the deadline for these replacements?

The exchange, extinction and creation of new tributes will not happen overnight. The new taxes and the old ones will coexist for an adaptation period. For the taxpayer, the transition would start in 2026 and last until 2032. At the federal level, PIS, Cofins and IPI would be extinguished in 2027, with the entry into force of CBS and IS. In the case of IBS, managed by states and municipalities, the term will be longer: it will start in 2026, with a test rate of 0.1%, and will have a “staircase” from 2029 to 2033, when ICMS and ISS will be extinct. 

At the end of the day, what will be the rate paid by the taxpayer?

The unified VAT rate will still be defined by means of a Complementary Law. So far, what has been released is that it should be close to 25%, already considering the sum of IBS and CBS. However, nothing is guaranteed.

Also because, throughout the process, the original idea of ​​having a single rate for all goods and services was abandoned, and some exceptions were created.

Thus, there will be three rates:

  • one zero, for some items in the basic food parcel to be defined by complementary law, in addition to vegetables, fruits and eggs;
  • an intermediary one, for activities benefiting from the 60% reduction in the general rate, which includes the areas of education, health, public transport, among others;
  • and a full one, of that 25% (or more), which will be charged from the other activities of the economy.

Until the time of the vote, this tax reducer was a 50% “discount” on taxes from sectors such as health and education. But at the last minute, there was an increase to 60%. Public transport, health, education, culture and agricultural products outside the national basic basket will pay 60% less VAT, a tax that will combine the Contribution on Goods and Services (CBS), collected by the Union, and the Tax on Goods and Services (IBS ), the responsibility of states and municipalities.

What is the selective tax that will be created?

Selective Tax (IS) will be an extra fee applied to certain products that are considered harmful to health or the environment, such as pesticides, cigarettes, alcoholic beverages. The rates have not yet been defined and must be determined by means of a Complementary Law from the Executive. In a way, the IPI levied today on these products is already higher than that applied to other goods. In a provision of the text, it states that the IS cannot be levied on goods and services with a reduced VAT rate.

Does the PEC provide for different regimes for certain sectors? Which ones?

Yes, there will be specific regimes for fuel, transactions with real estate, health care plans, financial services and betting (prediction contests). In the new opinion, however, the rapporteur modified the PEC to provide that part of the financial services will be taxed in VAT. “We will treat tariffs and banking services with VAT and spread them at the rate in the way it is taxed today, at the rate defined by a complementary law”, said the rapporteur.

A specific regime was also created for hotel services, amusement parks and theme parks, restaurants and regional aviation. It was a demand from the events and tourism sector, which accused an increase in the tax burden and loss of competitiveness with normal VAT. The taxation model will be defined by law.

How is the taxation of the basic food parcel?

The text resets the rate of the future Value Added Tax (VAT) for items to be included in a complementary law, in addition to fruits, vegetables and eggs. This law will create the “basic national food parcel”, a list that will be detailed later.

Will Simples Nacional end?

No. According to the proposal, this form of collection will be maintained. According to the Ministry of Finance, “micro and small companies (MSEs), if it is more favorable to them, may choose to calculate VAT through the debit and credit system”.

Does the reform change taxes on wages or investments?

The text of PEC 45 does not deal with taxation of wages or investments, focusing only on taxation on consumption. However, the changes on income tax and investments are already under debate and the federal government hopes that, by the end of the year, these issues will be voted on. This will be the next step to complete a broader reform, as promised by the current government’s election campaign.

It is worth remembering that, through a Provisional Measure, the Executive extended the Income Tax exemption range, which should be valid from next year. To compensate for this tax waiver, the text also anticipated that there will be changes in the taxation of investments abroad, to increase revenue.

Will the reform end the tax war?

The so-called fiscal war is a term used to explain the competition between states to attract investment and companies. As today there is taxation at the place of production of the goods, the states reduced the ICMS as a means of becoming more attractive to these investors, by offering a lower tax burden.

Thus, there was a dispute of “who gives the least” tax, which ended up harming the collection of some states and what others considered an unfair mechanism. As of the reform, the collection is made at the place of sale and no longer at the production of the good. The ICMS, which will cease to exist over the years, will be replaced by the IBS, which will be a tax managed by the Federative Council and no longer by each state independently. This council will be formed by representatives of states and municipalities from all over Brazil. Thus, the expectation is that yes, the reform will promote the end of the fiscal war.

The collection will gradually move from the place of origin of the product/service to the place of consumption/destination. This federative transition will only end in 2078 and, to soften the effects of the end of the fiscal war, the Union promised to transfer R$ 40 billion per year from 2032 to the States to invest or subsidize the attraction of companies.

How will the Federal Council work?

The council will be formed by 27 representatives, one from each unit of the Federation, plus 27 representatives from the municipalities. Of the municipal representatives, 14 will be elected by a majority of equal votes between the entities and 13 based on the size of the population.

The council’s decisions will only be approved if they obtain, at the same time, votes from the numerical majority of the states and representatives that correspond to more than 60% of the country’s population. Municipal votes will be counted based on an absolute majority.

What is the importance of the reform for the market?

The subject was one of the most anticipated on the economic agenda by the financial market. This is because the tax reform should simplify and improve the current tax system, considered by many to be bureaucratic, complicated and even too costly, which hinders the country’s economic (and consequently social) growth. There are those who claim that it raises the costs of companies, which ends up harming the growth and investment of companies in their businesses, including hiring employees. With simplification, the market expects there to be an incentive for business.

If you want to clarify all your doubts about Brazilian tax system, talk to one of our specialists. 

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